On 4 May 2017 SARS issued Binding General Ruling No. 41 (“BGR41”) which requires of non-executive directors to register for VAT provided they satisfy the registration threshold and other requirements. Whilst the principles involved for South African resident NED’s are straight forward and fairly simple, for non-resident NED’s this is not necessarily the case.
BGR41 merely confirms that the exclusion from the requirement to register for VAT that applies to salaried persons does not apply to NED’s. This does not mean that all NED’s must now register for VAT. All other requirements must be satisfied, the most prevalent in the case of a non-resident NED is that the NED must carry on an “enterprise” as defined in section 1 of the VAT Act.
One of the requirements that must be satisfied before a person can be said to carry on an “enterprise” is that such person must conduct a business or some activity in or partly in South Africa on a continuous or regular basis. Where a NED renders all his/her services outside South Africa, that NED does not conduct an enterprise in or partly in South Africa and would not have an obligation to register for VAT, despite BGR41. What exactly would constitute “continuous” or “regular” will depend in the facts in each particular case.
Where, however, an NED can be said to conduct an enterprise in South Africa further important factors come into play such as issues associated with VAT registration and the VAT rate to be applied to the services rendered by such NED.
VAT registration issues
- Before a person may apply for VAT registration, that person must have a South African bank account (there are exceptions to this rule, non, of which would apply to NED’s). Depending on the circumstances of the relevant NED, this may be more difficult than it sounds given that the banks are reluctant to open a bank account without that person having some form of business presence in South Africa. Creating such presence merely for the purpose of opening a South African bank account may, however, create South African income tax issues for such NED.
- A representative vendor must also be appointed before a NED may register for VAT. This must be a natural person who resides in South Africa (again, certain exceptions exist that would not apply to NED’s).
- Services physically rendered outside South Africa generally qualifies for the zero VAT rate. Accordingly, where the NED renders majority of his or services outside South Africa, the majority of the services may qualify for the zero rate provided all the necessary supporting documents are available and all requirements satisfied.
BGR41 does not as a general rule require of all NED’s to register for VAT in South Africa. Only those that meet the requirements. In addition, there may be room for some NED’s to request SARS to make a special arrangement in terms of the VAT Act given that most services may be rendered outside South Africa.
NED who are not resident will be well advised to seek advice from expert tax advisors on their obligation or otherwise to register for VAT as well as the concomitant income tax risks associated with same.
Author: N Theron